DETROIT RUNS OUT OF OTHER PEOPLE’S MONEY

"The problem with socialism is eventually you run out of other people’s money," said British Prime Minister Margaret Thatcher.

"History repeats itself, first as tragedy, second as farce," said Karl Marx.

For the city of Detroit, "eventually" was Thursday, July 18, 2013 — the day the Motor City became the largest city ever to file for bankruptcy protection.

Detroit filed for bankruptcy after Kevyn Orr, the emergency manager appointed by Gov. Rick Snyder in March, was unable to get the city’s major creditors to settle for pennies on the dollar.

Detroit owes more than $18 billion, mostly to public employee unions, their members, and to owners of municipal bonds.  Servicing that debt consumes more than 40 percent of the city’s revenues. Debt service will consume nearly two thirds of Detroit’s revenues by 2017 if nothing is done, Mr. Orr’s office said.

By declaring bankruptcy, Mr. Orr gains more freedom to administer a haircut to the bondholders, and to rewrite union contracts.

The farce began when Ingham County Circuit Judge Rosemary Aquilina ruled the bankruptcy filing must be withdrawn, because it violates Michigan’s constitution, and embarrasses President Barack Obama.

"It’s cheating, sir, and it’s cheating good people who work," Judge Aquilina told Asst. Michigan Attorney General Brian Devlin. "It’s also not honoring the president, who took (GM and Chrysler) out of bankruptcy."

She would send a copy of her order to Mr. Obama, Judge Aquilina said.

"We refused to let Detroit go bankrupt," the president boasted in his weekly radio address a few weeks before the election last year, referring to the 2009 bailout of General Motors and Chrysler.  I doubt he was pleased to have Ms. Aquilina remind people of that.

"Any hope of a federal bailout to avert bankruptcy fizzled last week after Mr. Orr spoke with the White House, including Obama confidante Valerie Jarrett," reported the Wall Street Journal.

Judge Aquilina ruled in a suit brought by union pension funds to block the bankruptcy filing, but she was too late. Mr. Orr filed bankruptcy papers in federal court five minutes before her hearing began.  Federal law trumps state law in bankruptcy proceedings.

In 1960, Detroit was America’s 5th largest city, with a population of 1.67 million.  Per capita income was the highest of any major city.  Fewer than 700,000 people live in Detroit now.  Their per capita income last year was $15,261.  The national average was $42,693.

Detroit today looks more like Hamburg or Berlin circa 1945 than the Detroit of 1960. There are approximately 78,000 vacant structures, of which 38,000 are "dangerous." More than 20 square miles (of 139) is vacant land.  There are just 370 functioning street lights per square mile.  Pittsburgh has 682, Cleveland has 812.

Detroit was wounded by a race riot in 1967, the Arab oil embargo in 1973, competition from foreign auto makers who made cheaper, more reliable cars.  But what killed the Motor City was the cynical deal in which public employee unions give votes and campaign cash to Democrats, who pay them off from the public treasury.

The payoff comes mostly in lavish pension and health benefits. Since much of the cost of these is deferred, it can be concealed from voters. Of $11 billion in unsecured debt, about $9 billion is for health and retirement benefits for current and retired city workers.

The number of public employees swells, because Democrats and union bosses want more people beholden to them.  But as the cost of public services rises, quality often declines, because most of the money is going to the public servants, who aren’t held accountable for results.  (Detroit has the worst performing schools, but the best paid teachers.)

To pay for this army of the poorly performing, taxes are raised.  (Among the 50 largest cities, Detroit had the highest taxes and lowest property values, according to a 2011 study.) This, coupled with a hostile regulatory environment and deteriorating public services, sends small business and the middle class in search of greener pastures.

A reckoning with reality can be postponed, for a time, by borrowing money.  In each of the last five years, Detroit has spent $100 million more than it has taken in.  But eventually you run out of other people’s money.

The bankruptcy filing is about "busting the unions" said their chief negotiator.  It would be more accurate to say the unions busted Detroit.

"Detroit gave unions keys to the city, and now nothing is left," said Forbes magazine.